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Can Two Indian Parties Enter Into A Contract To Be Governed By The Laws Of A Foreign Country?

The Supreme Court in National Thermal Power Corporation v Singer Corporation[1] stated that the proper law of the contract should be determined according to the legal system, by which the parties intended the contract to be governed,[2] viz. the proper law of the contract. The only limitation on this rule is the intention of the parties must be expressed bona fide and should not oppose the public policy.

The dispute arose from an international contract between an Indian and English company, which contained an express choice of law clause in favor of the English legal system. Relying on Dicey's interpretation of party autonomy, the court further added that the express intention of the parties is generally decisive in determining the jurisdiction of the parties must be expressed bona fide and it should not be opposed to public policy.[3]

As opposed to Cheshire's objective interpretation, Dicey advocated the choice of any law, even when it does not coincide with the centre of gravity of the contract.[4] The court stressed that the only limitation to the parties' right was that it was 'bona fide and legal'. [5] The dictum adheres to internationally accepted standards and best practices on the subject. Thus, the parties entering into contract must include a clause which is against public policy and the against the Section 23 and 28 of Indian Contract Act. Therefore, the governing laws should be in accordance with the public policy.

The Supreme Court in Modi Entertainment Network and Another v WSG cricket PTE. Ltd. [6] opined that the principles of Indian Private International Law permit the choice of any foreign law, including a neutral one. The Court opined that:
It is well settled principle that by agreement the parties cannot confer jurisdiction, where none exists, on a court to which CPC applies, but this principle does not apply when the parties agree to submit the exclusive jurisdiction of foreign court.

The court opined that parties to the contract may agree to have their disputes resolved by a Foreign Court termed as neutral court creating exclusive or non-exclusive jurisdiction in it.” The court commented on the validity of the parties' choice in favor of the English courts and its law to govern all disputes arising from their transnational licensing agreement to telecast a cricket tournament being held in Kenya on television in India.

Subsequent decisions of the Supreme Court of India have established that party autonomy in the choice of law similarly extends to international commercial arbitration where the doctrine has been held 'virtually the backbone' and 'one of the foundational pillars.'[7] The judiciary has consistently highlighted the parties right to choose a governing law across India following the decisions of the Supreme Court in the dicta indicated above.[8]

In the matter of TDM Infrastructure Private Limited v UE Development India Private Limited[9], the Supreme Court of India confirmed that Indian nationals contracting between themselves are not permitted to contract out of the application of Indian law in matters pertaining to Indian public policy. However, Indian courts follow the doctrine of precedents which states that the judgment of the courts has to be read in the context of questions that come forth for determination before it.

The observation made in the case of Sasan Power Limited v. North American Coal Corporation[10] shed light with respect to whether two Indian parties could enter into an agreement to be governed by the laws of another country. The apex court clarified that since the issue of a foreign element was involved in the agreement, the parties have the autonomy to choose foreign law. Therefore, Arbitration Act does not prohibit two Indian parties from opting for foreign law, thus negating any violation of public policy under Section 23 of the Contract Act where the foreign element is present.

Also, Hakkam Singh v. Gammon (India) Ltd[11] illustrated that subject to the exception that jurisdiction cannot be conferred by the parties' agreement on a court which would ordinarily not have jurisdiction under C.P.C.

In Bharat Aluminium v Kaiser Aluminium[12] the Hon'ble Supreme Court held that the governing law clause in the contract between both, the parties clearly indicate that by reason of the agreement between the parties, the governing law of the agreement was the prevailing law of India. However, in the case of arbitration the English law was applicable. Therefore, law of the forum for arbitration was English law but substantive law will be Indian Law.

Further, the Delhi High Court in Dholi Spintex Pvt Ltd. V. Louis Dreyfus Company India Pvt. Ltd.[13] has held that two Indian parties can choose a foreign law as the law governing the contract with arbitration clause between them since the arbitration agreement is an independent agreement, it may be governed by a proper law of its own, which need not be the same as the law governing the substantive contract.

It was clarified in the judgement that the substantive law of a contract can be governed by a law different from the law governing the arbitration agreement. Thus, arbitration can be governed by foreign law even when the contract in itself ought to be governed by Indian jurisdiction.

In light of the above, two or more Indian parties to a contract can stipulate their contract to be governed by a foreign law provided that it is not opposed to Indian public policy. Additionally, the substantive law in the contract should have the involvement of foreign element in its application subject to the facts of a given case.

End-Notes:
  1. National Thermal Power Corporation v Singer Corporation, [1992] 3 SCC 551
  2. A Dicey, J Morris, & L Collins (eds), Dicey and Morris on the Conflict of Laws (11th edn, Sweet and Maxwell 1987) Rule 180: Sub-Rule (1), which defines 'the proper law of the contract'.
  3. A Dicey, J Morris, & L Collins (eds), Dicey and Morris on the Conflict of Laws (11th edn, Sweet and Maxwell 1987) Rule 180: Sub-Rule (1), which defines 'the proper law of the contract'.
  4. Dicey and Morris on the Conflict of Laws (n 24) 1161'96
  5. National Thermal Power Corporation v Singer Corporation, [1992] 3 SCC 551
  6. Modi Entertainment Network and Another v WSG cricket PTE. Ltd [2003] 4 SCC 341.
  7. Centrotrade Minerals & Metal Inc v Hindustan Copper Ltd, [2017] 2 SCC 228. Also see, Deveshi Mishra v Oriental Structural Engineers Pvt Ltd., [2018] 249 DLT 619.
  8. See in this regard, the decisions of the High Court of Bombay, Calcutta, and Delhi in Rhodia Ltd and Others v Neon Laboratories Ltd, AIR 2002 Bom 502; White Industries Australia Ltd v Coal India Ltd, [2004] 2 Cal LJ 197; Swatch Ltd. v Priya Exhibitors Pvt. Ltd, (101) DRJ 99; Shree Precoated Steels Ltd. v Macsteel International Far East Ltd. & Anr, [2008] 2 Bom CR 681; and Max India Ltd. v General Binding Corporation, 2009 (112) DRJ 611 (DB); Deveshi Mishra v Oriental Structural Engineers Pvt Ltd., [2018] 249 DLT 619.
  9. TDM Infrastructure Private Limited v UE Development India Private Limited, (2008)14SCC271
  10. Sasan Power Limited v. North American Coal Corporation Civil Appeal No. 8299 of 2016 (Arising out of SLP (C) No. 3327 of 2015
  11. Hakkam Singh v. Gammon (India) Ltd, AIR 1971 SC 740.
  12. Bharat Aluminium v Kaiser Aluminium 2012(3) ARBLR515(SC).
  13. CS (COMM) 286/ 2020 decided on 24th November 2020

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